This is not the reason for lack of innovation. If that was the case, China would have not moved up the ranks with a legal environment that makes this law look like nothing. The reason why nobody competes with youtube is because youtube is big because of platform and network effects, so the distribution of users basically looks like a power law distribution.

The only way to compete is actually to move towards a closed internet. Shut Youtube down in Europe and build a national champion that provides the same service. It's fine to defend the open internet, but it's got nothing to do with innovation. Europe lacks in this regard for very different reasons, among them non-existent of VC funding and no concentrated knowledge networks. Europe has no Silicon Valley. The Silicon (semi-conductor) part of that name being vital.